Buying American

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Nasdaq Stock Market Inc. was having trouble going global. For more than a year it had courted the London Stock Exchange, amassing a 31 percent stake before being rebuffed in a bid for a full-fledged merger. Last May Nasdaq changed course, offering $3.7 billion for Sweden’s OMX AB equity and derivatives exchange, only to be outbid by two Persian Gulf state funds. Some began to doubt Nasdaq’s global future — except perhaps as a target itself.

Then, in September, one of Nasdaq’s Gulf rivals, Borse Dubai Ltd., suddenly turned from spoiler to ally, agreeing to buy 20 percent of Nasdaq as part of a friendly deal. The plan was for Borse Dubai to pay a premium to relieve Nasdaq of most of its LSE stake, and to sell Nasdaq the 4.9 percent holding that Borse Dubai had accumulated in OMX. That could pave the way for Nasdaq to complete a purchase of the Swedish-based collection of exchanges that it had coveted.

“The deal is crucial to our global expansion,” says Nasdaq CFO David Warren. “Through Dubai, we will expand our brand in the rapidly emerging markets of the Middle East and Africa.”

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The Borse Dubai investment in Nasdaq illustrates a significant shift in the dealmaking world. As the heated merger-and-acquisition market cooled in mid-2007, and the once-dominant U.S. private-equity companies receded as a factor, the void was at least partly filled by two new classes of strategic foreign acquirers: wealthy state-owned companies from the Middle East and Asia, and independent conglomerates from emerging economies like South Korea, Singapore, and India.

“We see a pickup in interest from global companies wanting to assess their strategy in the U.S.,” says Cary Kochman, co-head of M&A for the Americas at UBS, who expects increased activity into next year. Indeed, of the $1.4 trillion spent on acquisitions of U.S. targets through September, foreign companies accounted for 20 percent, up from 14 percent last year. By far the sharpest rises have been from Asia and the Gulf states, according to Thomson Financial.

Already this year, the value of Mideast acquisitions of U.S. companies has grown fivefold, to $23.1 billion, while those from Asian nations have surged by 77 percent, to $32.7 billion. In one recent example, Seoul-based Doosan Infracore built up its construction-equipment line by paying $4.9 billion for the Bobcat construction-vehicle unit of Ingersoll-Rand Co., which is moving away from cyclical, capital-intensive businesses.

This influx of new M&A money reflects the rapid rate of wealth creation in the two regions of late. As Gulf states look to diversify their holdings and large Asian industrial players plot an expansion of their distribution footprints, many find U.S. assets attractive. And the dollar’s decline suggests that companies here will continue to be alluringly priced.

That is changing the way U.S. companies see their place in the world. “You have to think strategically, if not defensively, about how you are perceived in a global market,” says UBS’s Kochman. “If you are a Fortune 200 company CFO, the topic of defense or how other people view you as an acquisition is not always on the top of your mind. But in this environment, it needs to move to the forefront.”

Dwarfing Private Equity

As powerful a force as private equity has been, wealthy sovereign funds have much larger war chests. Singapore’s Temasek Holdings and China’s state funds, for example, are worth between $1.5 trillion and $2.5 trillion, according to U.S. Treasury Department estimates. As they divert more reserves to higher-yielding assets, they could grow to as much as $17.5 trillion within a decade, according to Morgan Stanley.

While the Carlyle stake was bought at a discount, such bargain hunting is rare among Gulf and Asian buyers. In fact, they often make topping bids for high-end assets. When Istithmar’s purchase of Barneys New York triggered a bidding war, for example, even the bankers were impressed by the price for the luxury-goods retailer. “Going in, I would not have expected this level of interest in retail,” says Michel Eck, chairman of Citigroup’s consumer/retail investment-banking division. (Citigroup provided financing for the debt and was an Istithmar adviser.)

What Buyers Want

Bankers, recognizing this new interest in retail, are talking to potential foreign corporate buyers and U.S. sellers about the possibilities. “They look for strong management teams and high-quality brands that have the potential to be capitalized on internationally,” says Eck. He adds, “There will be more activity coming out of the Middle East, given the pools of capital accumulated.”

The shift to Asian and Middle Eastern buyers is causing some concern among American politicians, of course. The Borse Dubai stake in Nasdaq is already being studied by Congress, led by Sen. Christopher Dodd, the Connecticut Democrat and Presidential candidate who also chairs the Senate Banking Committee. But while there may be concerns about specific deals, “it will take a long while for emerging markets to catch up with the United States,” says Bob Filek, a partner at the transaction services group at PricewaterhouseCoopers.

American sellers are not complaining. “This deal allowed both sides to accomplish a number of objectives,” says Nasdaq CFO Warren. “We were able to solidify our bid for the OMX, exit our LSE stake — at a nice gain, I might add — and build on our global reach. Borse Dubai was able to execute on global-exchange investment diversification as well as get access to our brand to build their market at home.”